Chapter 2 Risk Management Frameworks

Risk Management Framework is the company way of work with regards to

identifying, monitoring, mitigate, assess, and deals with risks.
Corporate governance relates to relationship between a companys
management, its board, its shareholders, and other stakeholders.
Structure within the company together with the delegation of duties and
responsibilities.
Typical framework: BOD -> CEO -> Senior Management (from business
unit and functions) -> Middle management -> Staff.
Risk: the probability of something happening that might jeopardize
achieving the objective.
Systematic risk -> cannot be reduced by diversification. A common risk
that is inherent in the system.
Diversifiable risk -> risk that can be reduced by diversification by
combinations of several distinctive risks.
Risk and Reward -> high risk high reward and vice versa.
Types of Risks
Financial Risk: Credit risk, market risk, and liquidity risk
Non Financial Risk: Operational risks, strategic or business risks,
application or implementation risks, contagion and related party risk,
competition risk, reputational risks, and so on.
Hazard risk and underwriting risks: Hazards -> fire, natural perils, crime,
injury and underwriting risk refers to mispricing.
Risk Management is the approach to manage the impact of risks in order
to achieve objectives. ERM is the process of identifying, managing,
control, exploit, finance, and monitor risks from all sources in the purpose
of achieving/maximizing the objectives based on the exposure of risks,
this is much more than risk avoidance or risk reduction.
Risk Management Process
1. Establish the context;
Needs to consider the internal (legal, regulatory, social
expectations, market, economics), external (risk appetite, risk
tolerance, capability within company), and risks management
context (project scope, time frame, costs, resources, roles and
responsibilities).
2. Identify Risks
It is not easy because: new risks are emerging, accidentally missed,
not easily understood, risks are changing, different perspective of
people
3. Analyze Risks
To understand the impact/likelihood of the identified risks might
have on the company.
Impact = high, medium, low

Likelihood = likely, medium, unlikely; this is like a heat map

Can also use a distribution of impact to better understand the range
of exposures.
Can also use models to quantify the risks
Stress testing to use many scenarios and understand its
implication to the company
Analysis and ERM To understand how the risks interact with each
other.
4. Evaluate Risks
5. Treat Risks
6. Monitor, communicate, and consult in each step process